Making Canada Relevant Again- The Economic Super-Thread

[Edward Campbell]

There is, happily in my view, no consensus amongst the leaders of major economies about what (if anything) should be done about the global economy according to this article which is reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail:

http://www.theglobeandmail.com/report-on-business/international-business/chinas-central-bank-sees-very-low-risk-of-hard-landing/article21075153/#dashboard/follows/

IMF warns global economy at risk; calls for bold action

KRISTA HUGHES AND LEIKA KIHARA
WASHINGTON — Reuters

Published Saturday, Oct. 11 2014

The International Monetary Fund’s member countries on Saturday said bold action was needed to bolster the global economic recovery and they urged governments not to squelch growth by tightening budgets too drastically, although Germany poured cold water on the idea of a new global “crisis.”

With Japan’s economy floundering, the euro zone at risk of recession and even China’s expansion slowing, the IMF’s steering committee said focusing on growth was the priority.

“A number of countries face the prospect of low or slowing growth, with unemployment remaining unacceptably high,” the International Monetary and Financial Committee said on behalf of the Fund’s 188 member countries.

The Fund this week cut its 2014 global growth forecast to 3.3 percent from 3.4 percent, the third reduction this year as the prospects for a sustainable recovery from the 2007-2009 global financial crisis have ebbed, despite hefty injections of cash by the world’s central banks.

The IMF has flagged Europe as the top concern, a sentiment echoed by many policymakers, economists and investors gathered in Washington for the Fund’s fall meetings.

European officials sought to dispel the gloom. European Central Bank President Mario Draghi said the drag from fiscal tightening in the euro zone was set to fade, while German Finance Minister Wolfgang Schaeuble downplayed the idea that the region’s largest economy was at risk of recession.

“There is no reason to talk about a crisis in the global economy,” Schaeuble said.

The IMF committee called for fiscal policy flexibility, but efforts to provide more room for France to meet its European Union deficit target looked set to founder on Germany’s insistence that the agreement on fiscal rectitude was set in stone and that the bloc would not be writing any new checks.

STORM CLOUDS GATHER

The United States has been a relative bright spot in the otherwise darkening global economic picture, and investors have rushed into dollars as a result.

Still, while U.S. growth has picked up, soft inflation and wage growth suggest the slowest-ever postwar recovery is not delivering a sustained boost to demand, and concerns are growing that the global slowdown will undercut the U.S. economy as well.

Top officials from the U.S. Federal Reserve highlighted growing risks, with the central bank’s No. 2 saying the global slowdown could delay plans for a U.S. interest rate hike.

“In determining the pace at which our monetary accommodation is removed, we will, as always, be paying close attention to the path of the rest of the global economy and its significant consequences for U.S. economic prospects,” he said at a conference of the Institute for International Finance.

The IMF panel urged nations to carry out politically tough reforms to labor markets and social security to free up money to invest in infrastructure to create jobs and lift growth.

“Our key concern is to look ahead so that we avert .... the very real risk of a prolonged period of subpar growth,” said Singaporean Finance Minister Tharman Shanmugaratnam, the panel’s chairman.

The committee also called on central banks to be careful when communicating changes in policy in order to avoid financial market shocks. While not naming any central banks, the warning appeared aimed at the Fed, which is set to end its current bond-buying program this month. Its next step, expected in mid-2015, would be to raise rates.

The Fed has debated a change to its commitment to holding rates near zero for a “considerable time” at its recent policy meetings, but is stepping gingerly to avoid roiling financial markets. It does not want a repeat of the “taper tantrum” it touched off last year when it signaled its easing of monetary policy was drawing to a close.

I agree that we, the OECD countries (plus a few) need to avert "the very real risk of a prolonged period of subpar growth.” The question is: How? The German prescription, austerity, isn't working; the US prescription, printing money, isn't working. Does Keynes have the answer? maybe, if we could get past the myths about what John Maynard Keynes might have said and read his words again. There is, still, a case for stimulus, but it must be the sort of stimulus that can be switched on and off - i.e. it cannot be any sort of social spending, and it should be financed by long term bond sales ... that means, de facto public works, mostly maintenance of public infrastructure: roads, railways, seaports, airports, sewers, sidewalks and so on. Increased defence spending, financed from tax revenues but without tax hikes, is also a choice, albeit, in pure economic terms, a decidely second best choice.

 

[a_majoor]

Long article on the genesis of Energy East, with some special attention to the various shenanigans by the Americans, the Irvings, India and other players in the game:

http://www.bloomberg.com/news/2014-10-08/keystone-be-darned-canada-finds-oil-route-around-obama.html?hootPostID=4f3e66907599c4d2f8f780a4e747296b

 

[Altair]

http://www.cbc.ca/news/business/loonie-oil-prices-could-fall-much-further-don-pittis-1.2799880

The Economist article suggests that this is not going to be just a blip but more of a sea change, as global oil demand plunges permanently. The article quotes a study by Citibank saying that oil use is already falling in rich countries. Most oil is burned to propel vehicles, and increasing fuel efficiency, including conversion to electric and hybrids, means we are using less for that.

It rejects the argument that growth in places like China will push oil use ever higher, saying emerging economies will see the advantage of leap-frogging to new technology and won't pass through the first world's gas-guzzling phase. In the year since that report, an explosion of solar in India, and an analysis by Lazard saying renewables had become as cheap as fossil fuels, only made the case stronger. 

Yesterday's report that Lockheed Martin has made a breakthrough in nuclear fusion that could be ready for use within 10 years, is just the icing on the cake.

As someone who fears the scientists have climate change forecasts right, and who believes that economics really does solve our problems, I find that analysis gratifying.

However, even if this is just one more downward spin of the perpetual price ferris wheel, the impact on the global and Canadian economy could be momentous. Because between each peak in oil prices there have been some very deep troughs

I wonder if a long term drop in oil prices would doom the wonder child of the Canadian economy, Alberta. Living here now and I'm not sure if they have diversified their economy at all yet, the way saskatchewan has with potash, agriculture, and oil.

 

[Kirkhill]

I wouldn't worry overmuch about the stability of Alberta's economy Altair.  I also live there.

Alberta can follow the same path as Saudi and just pump more oil (and gas) which will mean more pumps and pipelines.  Refineries may even become viable if selling crude becomes less profitable.

With respect to other industries - Alberta also has a strong forestry and agriculture sector as well as a very strong financial and services sector.  They just get masked by the overwhelming strength of the oil and gas sector.

 

[a_majoor]

While the numbers for Canada would be smaller (starting from a smaller base) we have the same issues (probably more so) and therfore suffer the same deficiencies in economic growth. Now having a situation like China, where 10% compounded growth rates are paid for at a huge cost in human suffering, ecological devastation etc. isn't the way to go, but we could look at how India's economy exploded after the elimination of the "permit Raj". I could certainly live with Canada's economy doing a reliable 3% per annum growth rate (rather than wishfully hoping for something even close); 5% would be even better:

http://www.forbes.com/sites/richkarlgaard/2014/09/30/americas-missing-wealth/

America's Missing Wealth

This story appears in the October 20, 2014 issue of Forbes.

“COMPOUND INTEREST is the eighth wonder of the world.” Did Albert Einstein say this? He should have. It’s true.

Few grasp compounding’s power. Or they do, but the need for quick gratification overwhelms their good sense. On the radio someone asks Dave Ramsey, the money guru with an avid following among the heartland’s middle class, whether it’s okay to take out a payday loan for special occasions. “Like what?” asks Ramsey. “Um, tickets to the state fair,” the caller answers. Now, understand that Ramsey is a debt hawk who hates credit cards. The idiocy of taking out a usurious payday loan for state fair tickets is like sending a plump pitch over the plate. “Were you born stupid,” Ramsey asks, “or do you try your best to act that way?”

Let’s ask that question of our federal government.

Suppose the U.S. economy, since 1949, were giving up 2% extra growth per year because of bad economic policy. Or, as Ramsey might say, because Presidents, legislators and unelected regulators were born stupid or try their best to act that way.

Now, 2% a year doesn’t sound like much. Most of us could spend 98% of our budget next year without too much pain. The quip about compound interest is noteworthy only because it would take a genius like Einstein to observe something so profoundly simple yet subtly opaque.

But run the numbers yourself–and prepare for a shock. If the U.S. economy had grown an extra 2% per year since 1949, 2014′s GDP would be about $58 trillion, not $17 trillion. So says a study called “Federal Regulation and Aggregate Economic Growth,” published in 2013 by the Journal of Economic Growth. More than taxes, it’s been runaway federal regulation that’s crimped U.S. growth by the year and utterly smashed it over two generations.

Not all regulation is bad. Mandatory seat belts have helped cut traffic fatalities by 51% on a population-adjusted basis since 1949. Far fewer people are now killed or maimed in industrial accidents. The air in downtown Los Angeles is breathable again. Would this have happened without federal regulation? Yes, but likely not as fast.

REGULATION KILLS RICHES

So let’s, for the sake of argument, posit that some regulation has been good for us, while many other regs have only hurt economic growth. Let’s also argue that sensible regulation, combined with the retirement of outdated regulation, could have brought about the same improvements to health and safety–but at a cost of 1% potential growth per year, not 2%. Where would the U.S. economy be today?

–The 2014 GDP would be $32 trillion, not $17 trillion.

–Per capita income would be $101,000, not $54,000.

–Per capita wealth would be $480,000, not $260,000. It would probably be higher than that, since savings rates might be higher.

–The U.S. would have no federal, state or municipal debts or deficits.

–Pensions would be solid. So would Social Security.

–The trend of new entrants to The Forbes 400 would not favor entrepreneurs in software, the Internet and financial services but would be more broadly distributed across all industries. Electronic bits–money and software–are less prone to regulation than such physical things as factories, transportation, etc.

–Faster, quieter successors to the supersonic Concorde? Cheap, safe nuclear power? Cancer-curing drugs for small populations? Bullet trains financed by private investors? Yes!

–The U.S. would have the resources to fight the multiplicity of threats from abroad, from ISIS to hackers.

Am I guilty of positing ideal outcomes from all that extra wealth? Perhaps. Still, it would be wonderful to have that extra wealth in people’s pockets and in government treasuries. What a missed opportunity!

Let’s start electing people who are pledged to rethink regulation. This might sound like a conservative partisan plea. It’s not. John F. Kennedy, Ronald Reagan and Bill Clinton–two Democrats and a Republican–were the best Presidents since 1949 regarding regulation (by “best” I mean that these three Presidents allowed regulation to grow the least). The three worst: Harry Truman, George W. Bush and Barack Obama.

 

[Edward Campbell]

As a major oil exporter, I'm not sure Canadians should be chearing this.

But here, reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail is an explanation of why $80.00/bbl oil might help the broader Canadian economy (beyond the oil patch):

http://www.theglobeandmail.com/report-on-business/rob-commentary/rob-insight/how-80-oil-is-actually-good-for-canada-in-the-long-run/article21465533/

How $80 oil is actually good for Canada in the long run

SUBSCRIBERS ONLY

David Parkinson
The Globe and Mail

Published Wednesday, Nov. 05 2014

The general rule of thumb is that what’s good for the global economy is good for Canada (small, open, export-oriented, commodity-heavy economy – stop me if you’ve heard all this before). But the rule breaks down when we’re talking about oil.

Or does it?

It’s a pretty important question when we’re staring down the barrel of $78 (U.S.) oil, in an economy that has leaned pretty heavily on a strong energy sector to lead it out of the export wilderness, create jobs and generally grease some pretty squeaky wheels of growth.

When a lift-off in business investment is the key missing ingredient in your wobbly economic recovery, it’s hardly comforting to see the oil and gas business, which has delivered more than 40 per cent of Canada’s capital spending growth since the recession ended, suffer a 25-per-cent price drop in its main product in just five weeks.

And just in time for oil company budget season, when the industry’s big spenders are deciding how much to commit to capital spending in 2015. Another reason for uncertainty, doubt and cautious purse strings.

There has been considerable debate during oil’s slide about how big a deal it is to the Canadian economy if the downturn is sustained, but the general conclusion is that it’s a small yet meaningful negative – the downside for the country’s large energy sector outweighs the upside for consumers.

The Bank of Canada recently estimated that the roughly $20-a-barrel drop in the oil price from the beginning of summer to mid-October is worth about one-quarter of a percentage point on Canada’s gross domestic product growth for 2015. That’s less of a deal if your economy is humming along at 3-per-cent growth; it’s a bigger issue when annualized growth is under 2 per cent, as recent estimates suggest it could well have been in the third quarter.

But for most of the rest of the world, lower oil prices have the opposite effect – the break they deliver to consumers is a considerable net economic lift. Capital Economics, an independent economic research firm based in London, this week estimated that a $20 drop in the price of crude (which is about what we saw from mid-June to mid-October) would deliver a 0.4-percentage-point rise in global economic demand.

The Bank of Canada estimated that oil’s drop since the start of the summer would boost U.S. economic growth by 0.2 to 0.4 of a percentage point over the next year.

Some of this is simply because most of the world’s biggest economies are bigger consumers of oil than producers. But more importantly, a lower oil price represents a transfer of money from oil producers to consumers – and consumers have proven much more likely to actually spend that money than producers.

(Producers have tended to sock away a significant portion of their windfall from $100 oil prices for a rainy day; the big oil countries of the Gulf region have been particularly big savers.) So having the money in consumers’ hands will mean a net rise in total consumption of all goods and services.

At a time when much of the global economy is struggling, this transfer of money to consumers is not the worst thing that we could do; indeed, it might be one of the best. The desired economic effect is similar to that of tax cuts – but for so many countries that are still wrestling with budget deficits and committed to austerity, this tax cut comes essentially for free, from a fiscal standpoint. Free, I think we can agree, is a good price for economic stimulus.

The resulting lift in the global economy is, ultimately (if not immediately), a positive for Canada – even for Canadian oil producers. A recovery in global demand is what Canada needs to drive its export revival over the longer term, rather than a set of inflated commodity prices that weren’t strongly supported by underlying supply-demand fundamentals.

And let’s not forget that the United States, which accounts for fully three-quarters of Canada’s exports, will be a key beneficiary of this oil-price dividend and the resulting lift in demand.

It’s worth noting that the oil and gas sector’s biggest year for capital spending growth since the recession wasn’t either of the past two years, when crude prices averaged more than $97 a barrel. It was 2010, when the average price was under $80 – but the global economy was rebounding and the demand outlook was on the upswing. It suggests investment in the sector isn’t driven by high prices (though they don’t hurt), but by demand growth.

This isn’t to say that Canada and its oil sector won’t feel a sharp sting from oil’s slump over the next few quarters – they absolutely will, assuming the price doesn’t bounce back. But if the consumer benefits can provide a kick to the global economy and further accelerate U.S. demand, Canada’s short-term pain could lead to longer-term gain.

Given its HUGE size, anything that might help Ontario recover - by supplying goods (and services) to meet American demand will be good for Canada, at large. Alberta and Saskatchewan cannot carry the country indefinitely.

 

[Hisoyaki]

The US Fed has announced rate hikes for next year.

Interesting times are ahead for Canada, and indeed the world...

http://www.businessinsider.com/gerard-minack-on-fed-rate-cycles-2014-11

 

[CougarKing]

Just one vote derailed the Keystone XL bill from passing... 

Reuters

Senate narrowly fails to pass Keystone XL pipeline bill

Reuters – 8 hours ago

WASHINGTON (Reuters) - The U.S. Senate on Tuesday narrowly failed to pass a bill that would have approved construction of the controversial Keystone XL pipeline, rejecting a measure the House of Representatives approved last week.

The vote count was 59-41 in favor, but 60 "ayes" would have been needed to assure passage. Fourteen Democrats voted for the bill, joining all 45 Republicans who voted to support the pipeline.

(...SNIPPED)

 

[Edward Campbell]

I am somewhat concerned that Australia is eating our Asian trade lunch, but this report (BBC News) suggests that both Australia and Sweden are "better" places to do business than Canada and that the USA, despite its many, many problems is close behind us.

I understand why Singapore, Switzerland and Hong Kong are "best for business," but we really should be "better" than Sweden and, in a perfect world, tied with the Aussies.

 

[a_majoor]

This piece could fit in a lot of places, but the issues that affect Quebec also affect many other provinces (and indeed Canada as a whole). The use of Brownshirt tactics (disguised as political theater) to thwart the ability of the Legislature (and by extention the "will of the people" who elected them in the first place) is very disturbing, and Quebec isn't the only place where these things happen (think about the activities of "Occupy", the "Ontario Anti-Poverty Coalition" or other "protest" groups). Long term, this could be quite damaging:

http://business.financialpost.com/2015/02/24/william-watson-austerity-or-a-quebexit/

William Watson: Austerity or a Quebexit?
William Watson | February 24, 2015 5:35 PM ET

If a place doesn’t get its debt under control, interest payments eventually devour its useful spending. Greek salad, anyone?

Maybe the only good thing about the deep freeze that has descended upon eastern Canada — when was it, about seven months ago? — is that it has put a crimp on the National Week of Action Against Austerity. (This is Quebec, so of course ‘national’ actually means ‘provincial.’) The week’s planners had in mind 40 separate events that were supposed to disrupt life in downtown Montreal, for once their event is over they go marching off through downtown, parade permit or no parade permit. But it’s hard getting turnout when anyone who stands still for more than five minutes turns into a pillar of ice.

In the first run-through of mass action against fiscal sanity during the student protests in the spring of 2012 the endlessly inventive organizers had their troops parade topless or even nude, though with their crucial bits covered up by the red cloth squares that were the no-logo protest’s logo. That tactic, which guaranteed extensive news coverage shot from inventive angles, has been put on hold. In the first of the protests, outside Premier Philippe Couillard’s Montreal office, protestors’ faces were barely visible behind fur and wool and their lips seemed to have difficulty forming words, which was not a problem three years ago when the air verily oozed with sophistry.

The austerity the protestors are protesting refers to the new Quebec government’s attempt to rein in spending, boost tax revenues and balance its budget by 2015-6. To do so it is cutting the rate of growth of spending. Spending was $97 billion for the current fiscal year. It’s going to be $98.1 billion next and then $100.3 billion. Per Quebecer it’s currently $11,808, so if you’re a family of three: over $35,000, a family of four: getting on to $50,000 — per year, every year.

In nominal terms spending is not going down. In real terms, depending on the rate of inflation, which is minimal right now, it may go down a little. Granted, the number I’ve given is for ‘total consolidated expenditure,’ which includes interest on the debt. And interest is rising faster than program spending, though program spending is still going up. But you’d think rising interest payments  —from $10.6 billion this year to $11.1 billion next — would be a warning in itself. If a place doesn’t get its debt under control, interest payments eventually devour its useful spending. Greek salad, anyone?

Mind you, there are legitimate questions about just how useful Quebec’s current spending is. The government’s website lists 198 agences, bureaux, centres, comités, commissions, conseils, directeurs, fonds, instituts, ministères, offices, régimes, secrétariats, sociétés and tribunals. We didn’t always have 198 such organismes and we did reasonably well. You’d think we could give up or downsize or at least stabilize the growth of a few of them, maybe more than a few, without necessarily returning to the Dark Ages of the 1990s or 1980s.

The local evening newscasts are a good indication of how this place works. Typically, you get a couple of stories about this or that social group being up in arms about receiving less funding than it has become accustomed to. That’s true whether we’re in a week of National Action or not. You then get a story about a minister of the government launching this or that social initiative, these days ones that are more communications than content and that may not actually cost that much more than the press conference kicking them off. And you get a story, some nights more than one, about a water main having broken and some poor family’s basement having flooded. “Hundred-year-old infrastructure,” some official invariably shrugs. Do you think maybe resources are being — have been — misallocated? You think maybe maintenance of infrastructure — even privatizing of infrastructure — should get priority over social initiatives, however worthy? Infrastructure can actually be fixed. Social problems are stubbornly, notoriously resistant to government communications strategies.

Quebec is not yet Greece. It may not even be the worst Canadian province. But then again Greece didn’t used to be as bad as Greece is now, either. And the unwillingness among many protestors to recognize democratic judgments gives pause.

It’s true, as Andrew Coyne has written, that in cutting back the sumptuous subsidies to daycare the Couillard government has broken an election promise. It shouldn’t have done that. In fact, it shouldn’t have made the promise in the first place: In the current caterwauling over the distress of the middle class no one has fingered the upper-middle class for special sympathy, though they’re the main beneficiaries of this program.

Everyone obviously has the right to speech. But the view among many protestors seems to be only they have the right to decide. No matter how legitimate or recently-elected the government or its program is, ‘The Struggle’ requires relentless resistance. If disruption, including uncivil disobedience, can cow the legislature or frustrate the public and eventually turn it, exasperated, against the government, then that’s what has to be done.

The protestors want this spring, if spring ever arrives, to be a season of action, repeating their successes of 2012. We had an election last year. The polls suggest a strong majority is behind the new government’s goal of controlling spending and eliminating the deficit. My guess is they will fail. But if they should succeed, if Quebec proves governable, in the southern European way, only from the street, the rest of the country may need to think about arranging a Quebexit. As a lifelong Quebec federalist, I come to that conclusion sadly. But Confederation won’t function with a Greece at its centre.

 

[a_majoor]

More about how the Provinces might be the ones to pull Canada down. Ontario alone has a debt almost half the size of the Federal debt, and is still spending like crazy; only they have better tools to hide the ever growing obligations. A spike in interest rates, a hint of a default and a huge pile of dominos goes down and takes everyone else with them:

http://business.financialpost.com/2015/03/12/jack-m-mintz-provinces-play-hide-the-deficits/

Jack M. Mintz: Provinces play ‘hide the deficits’
Jack M. Mintz | March 12, 2015 | Last Updated: Mar 15 2:09 PM ET
More from Jack M. Mintz

(Editor’s Note: A slight correction appears at the end of this column.)

I was attending a recent meeting with a somewhat august group of individuals when someone referred to the recent British Columbia budget as being in surplus, praising the government’s prudent behaviour. Except for one thing. While the B.C. Minister of Finance forecasts the 2015-16 surplus to be $534 million, provincial debt is rising by $2.1 billion.

For the ordinary voter, how can this be? When a paycheque is less than household spending, the family must run down its bank account or take on more debt. If a government is therefore borrowing money, isn’t $2.1 billion the real deficit?

What B.C., Ontario, Quebec and several other provincial governments are doing is using some theoretically correct accounting measures to hide the walloping faced by taxpayers when debt must be eventually repaid.

Most provincial governments use so-called capital budgeting whereby infrastructure expenditures are not charged against the budget. Instead, an operating surplus or deficit is presented by subtracting the cost of replacing depreciating capital due to wear and tear. Capital depreciation is therefore treated as an expense like salaries and debt charges.

If money is spent on infrastructure such as roads and school buildings, such expenditures are not treated as a cost to the operating budget. Instead, a capital account shows the relationship between investments and financing sources, including debt.

For those people familiar with corporate financial reporting, this makes sense. Net income is calculated by deducting capital depreciation from profits. Capital spending is treated as a reduction in cash flow. If the company sells off financial assets, borrows money or issue new shares to corporate owners, cash flow increases. So to have enough cash on hand, a corporation has to earn enough profits on its capital expenditures to provide shareholders sustainable income over time.

So a government’s operating surplus is akin to the “net income” used by corporations for financial reporting. But, governments are not corporations. So is capital budgeting a good practice for politicians to follow?

The best argument in favour of capital budgeting is that investments in infrastructure provide benefits to current and future voters. Without capital budgeting, governments tend to avoid infrastructure spending that is immediately charged to the budget, thereby making current deficits look larger, which is particularly important when legislation requires balanced budget or limitations on deficits. So if capital spending can be spread over the lifetime of assets, a better picture evolves as to budgets in the long run.

This seems sensible until politicians take hold of accounting practices to hide their debt. From a public policy perspective, capital budgeting is letting provincial governments confuse the voter, most of whom are far from being financially literate. Provinces look like they are doing well running small operating surpluses while piling up debt to fund parks, transit and other non-income producing capital projects.

In the corporate world, money is spent on income-generating assets unlike the public sector with a majority of investments producing no income and has little market value. For example, two-thirds of B.C.’s borrowing is related to tax-payer subsidized capital.

Related
Jack M. Mintz: How provinces are hiding their spending
Jack Mintz: Provinces hurt own economies

While capital spending might create more jobs and future tax revenues, there are no assurances it does so. Some projects, like white-elephant sport stadiums and “bridges to nowhere,” won’t be producing tax revenues. Further, the taxes raised to pay for infrastructure will take away resources from other profitable pursuits.

Further still, many provinces have “balanced budget” legislation, which typically apply to their operating surplus accounts. Limitations on the size of the surplus or deficits create an incentive for governments to label spending as capital to shift expenses out of operating accounts to enable more public borrowing. In the U.K. and New Zealand, limits on debt were introduced so politicians couldn’t as easily shift expenses off the balance sheet to capital accounts to avoid deficit limitations.

B.C .is not the only government that paints a less disturbing budget while taking on more debt. Financially challenged Ontario reported last year a $12.5-billion operational deficit when it was running up its net debt by $20 billion. Seems the latter provides a truer picture of Ontario’s financial health.

Alberta reported recently a surplus of $465 million for 2014-15 even though its deficit, measured as the decline in net financial assets, is $2.4 billion.

I can think of no government in the world that calculates a deficit like Alberta. Unlike other provinces that only report an operating surplus, Alberta calculates a surplus as the change in all assets, including non-income producing capital. If Alberta reported its results similar to Ontario, the operating surplus would have been $2.2 billion even though the Province was massively borrowing money to fund infrastructure.

This fiscal messaging was of no help to Premier Prentice, who has been making the case for significant spending cuts or revenue increases. If the Premier emphasized the $2.4 billion decline in net financial assets as the true deficit, he would convey a truer picture of the Province’s situation.

The federal government, on the other hand, does not use capital budgeting to report financial results. Capital spending is charged to the budget just like salaries, transfers and other charges. A deficit really means that the federal government has to borrow money. At one time, I thought this was not the best practice, thinking that capital budgeting provides a truer picture of the benefits associated with infrastructure. However, with voter confusion over the meaning of a deficit under capital budgeting, I think the federal approach is more transparent as to what a deficit means in terms of borrowing.

With upcoming federal and provincial budgets, voters should beware. Public deficits are much worse if the taxman cometh to pick your pocket in later years when the chickens come home to roost.

Jack M. Mintz is the Palmer Chair, School of Public Policy, University of Calgary.

Correction:  The above column states that the federal government uses a modified accrual accounting, which was in place until the 2002-3 budget.  In fact, full accrual accounting including capital was adopted that year, although the difference between the operating deficit and changes in net financial debt are relatively little.  For 2013-14, the federal operating deficit was $5.2 billion and the change in net debt was $4.0 billion.

 

[a_majoor]

While Canada isn't starting off the X like the South American economies (we did manage to transition to an industrial age economy, even if it is/was largely a branch plant economy), many of the challenges of transitioning to a new economic model are going to be the same, and in our case there are a lot of institutional roadblocks in the form of structures and institutions which were created for the "old" system, and the people who benefit from the status quo. You thought the transition of the "Big Shift" was difficult?

http://www.the-american-interest.com/2015/03/30/can-latin-america-weather-the-death-of-the-blue-model/

Can Latin America Weather the Death of the Blue Model?

Some call it “The Second Machine Age,” some call it “post-Fordism,” and some herald the emerging “information economy.” But no matter what you call the coming change, the march of technology will require a fundamental reorganization of how human capital is deployed in the economy, and nobody quite knows how to prepare for it. Latin America is especially vulnerable, and while the region’s economic leaders are officially optimistic, there’s also an unmistakable note of fear. President of the Inter-American Development Bank Luis Alberto Moreno writes in Project Syndicate:


The MIT economists Andrew McAfee and Erik Brynjolfsson, among others, identify the Second Machine Age with the rise of new automation technologies and artificial intelligence. While optimists predict that these innovations will usher in an era of unprecedented abundance, less sanguine analysts estimate that nearly half of all jobs currently performed by humans are vulnerable to replacement by robots and increasingly sophisticated software.

Advanced technologies are already making inroads into some of Latin America’s principal industries. For example, carmakers, which employ hundreds of thousands of people across the region, are rapidly deploying robots that are more efficient and precise than humans. In South America’s grain belt, GPS-guided machinery is diminishing the need for farmhands, even as output increases.

Service industries, which already account for two-thirds of all jobs in Latin America, are particularly vulnerable. One Brazilian startup’s tax-management software, for example, can perform in seconds operations that would demand thousands of billable hours from an army of accountants. Other sectors that currently account for a large share of employment in lower-income countries – including apparel, light manufacturing, logistics, and call centers – are forecast to undergo increasing automation.

Moreno is right to be sounding the alarm bell. Latin America never really managed to develop a successful and inclusive social and economic system in the age of the blue model—the “First Machine Age” when industrialization supported armies of well-paid manufacturing workers and clerical employees. The first-world countries of Europe, North America, and Japan built an age of middle-class mass prosperity in those years—and Latin America mostly had its nose pressed to the window, looking on enviously from outside.

Now, a new industrial revolution is challenging the blue model Fordist utopias of the First World—and Latin America faces changes for which it is poorly prepared. Let’s hope some of Moreno’s good advice is taken, and it’s certainly likely that some Latin American economies (like Chile’s) will do better than others. But from the standpoint of geopolitics and foreign policy, the most likely outcome is that in a large number and perhaps a majority of those economies the challenges of transition will not be met, or at least will be met more slowly than in other parts of the world.

Change is hard, and it is particularly hard to move to Stage Two when you never quite managed Stage One.

 

[a_majoor]

Apparently no one has ever heard of the law of supply and demand, or looked at historic examples where decline in the labour supply increases the wages of the working class (indeed, the most extreme example is Europe after the Black Death; with 30% of the population gone demand for labour was so great it destroyed Feudal social structures like serfdom). What makes reading this article even more maddening is the critics of the law apparently have no conception that it is the very poor, unemployed and working class Canadians they claim to represent who will benefit the most.

http://business.financialpost.com/news/economy/thousands-of-temporary-foreign-workers-in-low-skilled-jobs-must-start-leaving-canada-today

Labour crunch looms as thousands of temporary foreign workers forced to leave today
Canadian Press | April 1, 2015 | Last Updated: Apr 1 9:23 AM ET
More from Canadian Press

OTTAWA — Thousands of temporary foreign workers could be heading to airports to leave Canada Wednesday as permits expire for those who have been in the country for more than four years.

Loss of temporary foreign workers will leave Canadian franchises struggling to find workers

In light of these changes, the most immediate issue for franchises is where they will find replacement staff when many of their workers leave in a few days. The government’s hope is that unemployed Canadians will fill the jobs, reinforcing its intent that TFWs only be accessed as a last resort when there are truly no Canadians available for the job. Keep reading.

The Conservative government set April 1, 2015 as the deadline for temporary foreign workers in low-skilled jobs to either become permanent residents or leave the country after changing the rules in 2011.

In Alberta alone, 10,000 temporary foreign workers have applied to stay in Canada.

Vancouver immigration lawyer Richard Kurland says there aren’t enough Canadian Border Services agents to knock on the doors of every temporary foreign worker and frog-march them to the nearest airport today.

Nonetheless, he says, many of his clients are grappling with the realization that they’re no longer welcome after living and working here for years.

NDP MP Jinny Sims says the deadline will likely force many workers underground.

She called the federal government inhumane for failing to allow the workers to stay in Canada while they’re waiting to hear if they’ve been granted permanent residence.

“The Conservatives ignored all the warnings that their deadline was going to have unintended consequences and now some consultants have taken advantage of desperate temporary foreign workers, bilking them of their life savings while making false promises,” she said Tuesday in the House of Commons.

Immigration Minister Chris Alexander replied that the temporary foreign worker program “is putting Canadians first.”

He added that “permanent residents have never been more numerous.”

Several organizations, including the Canadian Federation of Independent Business, have called for an easier path to permanent residence and eventually citizenship for temporary foreign workers, especially those employed in provinces with labour shortages.

They warn that hotel rooms won’t be cleaned and the lineups at fast-food restaurants will move a lot more slowly with fewer foreign workers.

Citizenship and Immigration Canada hasn’t divulged the total number of TFWs about to be sent home, but immigration and labour market experts have estimated tens of thousands of workers could be affected.

 

[TCBF]

- A lot of those foreign workers mysteriously disappear just before the return boat docks. They have a health card and contacts in their clan community and they are laying low.

- If they do leave, maybe your average high school and university students can now claim their part time jobs back, because those are the jobs that disappeared as soon as the invasion began.

 

[McG]

A key to prosperity is a properly educated workforce.  Canadian workforce is suffering from an over emphasis on university at the expense of college.

Cut university enrolment by 30%, expand colleges, CEO-commissioned report urges
University of Saskatchewan professor cites short-term thinking by schools, policy-makers
Pete Evans, CBC News
30 Mar 2015 (02 Apr update)

Canada would be better off if universities admitted 30 per cent fewer students every year and the college and polytechnical system got more of a focus, a report commissioned by the Canadian Council for Chief Executives says.

The report, written by Ken Coates, a professor at the School of Public Policy at the University of Saskatchewan, looks at the imbalances inherent in Canada's education system and concludes that neither students nor the economy are well-served by the status quo.

Coates says short-term thinking by schools and policy-makers is just as much to blame as a bias against so-called "blue collar" jobs by families and young people.

Put together, the result is that the current glut of ill-trained university graduates is being flooded into an economy that by and large has no use and no demand for them.

"Canada could dramatically improve the quality of university education by cutting enrolment as much as 25 to 30 per cent while maintaining budgets at roughly the same level."

That's a significant cut by any measure. But Coates's recommendations don't merely consist of blocking access to people and giving them no other options. Rather, he's a fan of technical schools and thinks they should be the beneficiaries of a major government push.

"Canada's superb and growing polytechnics system gets it," he says. "Its administrators and educators work closely with employers, focus on career-ready programs, and adapt quickly to new technologies and changing workplace requirements."

"Young adults and families should lessen their preoccupation with a university education and be far more open to the opportunities provided by colleges and polytechnic institutes," Coates says.

Most parents and young adults have a bias toward universities over colleges, harkening back to a time when university degrees were more rare and the key to unlocking higher earnings potential. A lowering of standards over the decades has watered down the value of that degree, however, even as the costs and prevalence of it has skyrocketed.

"Parents, it seems, do not particularly want their children to be plumbers or radiation therapists, and continue to be optimistic — overly so — about the economic prospects for university graduates in general," he says.

Governments are just as much to blame, he says, because of a focus on what he calls "bums in chairs" which has led to more universities being created, larger class sizes basically across the board  "and often reducing educational quality in the process," he says.

Governments do a terrible job of picking winners and losers in the economy, he says, even in job markets where governments essentially control the supply and demand — such as teaching and nursing.

"Every marginally talented student in the country can get into a college, and most can get into a university, even though many are ill-suited or unprepared for the experience," Coates says.

"Canada needs to shift away from this open-access approach — based on the idea that everyone 'deserves' a degree, or at least the chance to try to earn one — to one that is based on achievement, motivation and compatibility with national needs."

Coates says colleges deserve more attention precisely because they do such an excellent job of matching training with real-world employment needs and potential. But "so long as the economy was capable of absorbing large numbers of generalists, allowing universities to claim a huge income premium for their graduates, there was little or no need for universities to re-appraise their own program priorities."

He does not, however, let students off the hook for their perceived job prospects, noting that by and large, "the current generation of young people is defined by a sense of entitlement and an expectation that their lives will somehow unfold along a predetermined and positive trajectory."

http://www.cbc.ca/news/business/cut-university-enrolment-by-30-expand-colleges-ceo-commissioned-report-urges-1.3014893

 

[dimsum]

I completely agree with what Mr. Coates proposes, but as was stated, it will take a complete culture change to drop the "university > college" mentality, especially amongst new immigrants from Asia. 

If I were a Gr 12 student again and making the choice (again), my parents would have laughed off any notion of going to college, even though neither of them went to post-secondary school.  It was university or....well, another university.

 

[zulu95]

As a current college student in Ontario I think my story might be of some merit here.

When I was in grade 12 I had been hearing from my parents that university was the only way to go. They had both gone to university and so that's what I should do to. I put in my applications and was accepted but after a lot of thought I decided to take a year off to seriously consider what I wanted to do and eventually ended up going to college instead.

Had I gone to university I would have spent four years and well over $100 000 without much to show for it at the end. The only well paying jobs available that field required at least a master's degree which would have involved more time and a lot more money. Instead I'm currently debt free, and halfway through a two year program with a 92% employment rate in the field of study within a year of graduation. The average salary is higher than what I could have expected if I had gone to university, I will have a minimum of two years work experience and earnings more than anyone my age who attended university, and will have little to no debt when I graduate. From a financial point of view I would have been dumb to choose to go to university over college.

My parents were not very happy with my decision initially but after explaining ever thing to them they came to the same conclusion that I had and now fully support my choice.

There are many people here who have attended university for several years or even obtained degrees before realizing that except for the small percentage who go on to become professors or academics the point of post secondary education is to get a job and college is the best way to do that. I fully expect there to be a large movement towards college as an accepted alternative to university withing the next few decades.

 

[a_majoor]

Maybe this should be an election issue, but the article highlights a point I have made in the past; laws, regulations and structures are getting wildly out of line with the changes due to shifting technology and demographics. These changes are needed to clear obstructions to economic growth, and as the article makes clear, assist low income Canadians:

http://business.financialpost.com/fp-comment/taxation-and-regulation-in-the-era-of-uber-and-airbnb-present-new-hurdles-for-government

Taxation and regulation in the era of Uber and Airbnb present new hurdles for government
Finn Poschmann, Special to Financial Post | April 1, 2015 | Last Updated: Apr 1 5:47 PM ET
More from Special to Financial Post

Uber in Toronto now faces 36 by-law related charges

If you stay at an inn or hotel in Ontario, and fail to pay your bill on leaving, after two weeks the innkeeper has the right to place a lien on your horse, and to sell it.

The innkeeper, however, must sell your horse at public auction, and only after publishing a classified ad in the newspaper within his municipality or, if none, the newspaper published nearest to it. The Innkeeper’s Act is specific on this point, and it is clear that neither eBay nor Kijiji will do.

While the Act does not rule it out in so many words, neither does the law seem to allow the possibility that the innkeeper might wish to keep the horse, and earn money from it in a ride-sharing program. If you wanted, however, to contract a horse ride-sharing arrangement, you can find one on the web – the neat thing about markets is that they have a way of evolving to serve needs and wants, provided law and regulation allow them to flourish.

Related
Uber and Lyft rebuffed in quest to have drivers deemed independent contractors instead of employees
Uber will launch two safety features for riders in India after lawsuit over reported rape

Which brings us to the new fangled “sharing economy,” meaning how to find low-cost, efficient taxi rides or a place to stay, and perhaps keep your horse. Catching up with the sharers, like Uber and Airbnb, poses terrific legal and regulatory hurdles – and clearing those hurdles will provide us all a nifty economic boost.

The new web- and phone-based services, which link service suppliers and their potential clientele in more or less real time, do the same job as classified newspaper ads once might have done, even if they did so at an ossified pace.

The current technology, and ubiquitous access to it, provides real-time supply and demand information. That helps sellers and buyers almost instantaneously find a market-clearing price: The pace of the action is terrific for doing deals.

There is much more, owing to the network characteristics of these evolving markets. While the phone apps save time on finding prices that match buyers and sellers, as important is the scale, which allows more buyers to find more sellers. Together with the time-saving and lowered search costs for the parties to any deal, this drives down dramatically the overall transactions costs involved, a familiar economic phenomenon.

The new business models do not shift a finite amount of business from one part of the economy to another. When transaction costs fall, deals happen that otherwise would not. This increases the economic pie overall, which makes us on the whole better off. People’s assets and time are put to good uses, under terms they decide.

For those of us who have a spare room, spare time, a spare car, we are able to earn a return on assets that otherwise would rest idle

To see why, consider the slack resources available in unfilled car seats on highways, or rooms in a house going empty while the owner is away, as travelers wrestle to find a place to stay. The information flow – enabled by the new communication, deal-making and payment platforms and networks – lubricates those ordinary market frictions.

The changing market squeezes margins for hoteliers and existing taxi owners and drivers, and they protest that loudly; their prices, profits, and employment levels are all under pressure. Airbnb squeezes Hotels.com, which squeezed travel agents. Investments are under threat – in Barcelona, where exactly 10,523 taxi licenses are available, the going price is in excess of 145,000 €. Toronto, a bigger city, has less than 5,000, and the prices are much higher.

Nonetheless, the fact that more transactions happen between willing buyers and sellers, given the inexpensive network systems, unambiguously expands our economy’s capacity to do the things we apparently want it to do – like help us get from here to there and have a place to stay when we do.

For those of us who have a spare room, spare time, a spare car, we are able to earn a return on assets that otherwise would rest idle. And the gains are not evenly distributed – the benefits seem to go disproportionately to relatively low-income households.


Matthew Fisher: Baseball could be bond that helps draw old enemies, Cuba and the U.S., back together

Uber said it raised US$1.2 billion in its latest funding round and had additional capacity remaining for strategic investments, valuing the U.S. taxi service firm at US$40 billion

Read more
.
Researchers at New York University looked at a recent peer-to-peer car rental market, and discovered what might seem obvious as soon as you say it. The mechanism enables people who need car services to substitute rental for ownership: that lowers used car prices, and increases consumers’ benefits. And the effect is bigger for low-income renters, who also provide a lot of the rental supply. Households get a better quality of rental service, and they get the income from renting things they are not otherwise using at the time.

Regional fights over market access are inevitable, and occasionally make headlines, and centre on things like zoning, licensing and regulation, special taxes on hotel visitors, and … it is a long list.Uber in Toronto now faces 36 by-law related charges, and the city has filed an injunction against its activity.

Yet some things are even more fundamental, like the business laws that come before regulation and detail.
And the related business law questions are fascinating, and force new approaches to things like what is a business and what does it mean to carry on a business, and when must you register as one. Are our sales tax reporting thresholds appropriate? When is some form of incorporation required, if at all? Every jurisdiction has its own web of intricacies, and that is even before we get to zoning and property taxes and liability insurance.

The implications are simple. Technological change, as it often does, offers tremendous consumer benefits, and is putting on tremendous pressure for change in our legislation, regulation, tax and licensing frameworks. The potential benefits to consumers are huge, and our legislators and policymakers can help their constituents gain from this “sharing economy.”

Something to keep in mind as we refresh the laws and regulations resting uncomfortably on the books.

Finn Poschmann is vice president, policy analysis, at the C.D. Howe Institute.

 

[a_majoor]

Provinces still need to do far more to solve their overspending problems, otherwise, their debt could pull down the entire nation should a province (say, Ontario) do a Greece and start to get a credit downgrade or worse yet default:

http://business.financialpost.com/fp-comment/why-the-provinces-are-mired-in-debt-and-the-federal-government-is-just-fine

Why the provinces are mired in debt, and the federal government is just fine
Philip Cross, Special to Financial Post | April 15, 2015 9:38 AM ET

Sean Kilpatrick/The Canadian Press fileshe federal budget will remain balanced because the government has capped its future liability for health care transfers and pension obligations and begun the long, arduous process of reining in the compensation of its employees. .

Canada’s provincial governments are struggling with debts and deficits, unlike the sounder federal government

The release of the jobs numbers last Friday confirmed that the economy is doing better than anyone forecast in the wake of slumping oil prices. The net result of the usual noisy monthly movements was that jobs grew by 63,000 in the first quarter, nearly twice their gain in the fourth quarter. The increase was no fluke, as the leading indicators show weakness in the economy largely confined to the oil sector. Excluding commodity prices, the leading index continues to increase steadily, as manufacturers slowly begin to respond to an improving U.S. economy.

All of this contradicts Bank of Canada Governor Steve Poloz’s characterization of the economy’s performance in the first quarter as “atrocious.” Since it is hard to believe the Bank is susceptible to panic, this reinforces the suspicion that January’s surprise cut in interest rates was designed to engineer more weakness in the Canadian dollar. Poloz’s denials about trying to manipulate the currency mean nothing: In an interview on Bloomberg radio last Friday, former Bank of England Monetary Policy Council member David Blanchflower admitted Council members regularly talked down the exchange rate, although “publicly we always denied” that was their strategy.

Recall when the November jobs report showed a decline driven by losses in Alberta’s oilpatch, the whole statistical media complex confidently assured Canadians that the world was unfolding as it should. The Conference Board quickly forecast Alberta already was in recession, and worries grew that Canada could follow. Once again, this demonstrates the futility of reading too much into volatile monthly data. Four months later, job growth has accelerated nationally, with even Alberta posting a small gain to start the year. Economists and journalists struggle to find a convincing narrative to fit these facts, throwing out bromides like jobs are a lagging indicator or we forgot how large was the share of services in total employment.

The federal government will run a surplus for several reasons

The broader implication is that the federal government will run a surplus for several reasons. The economy is performing better than expected, especially taking account of the record cold in Eastern North America and a dock strike in the U.S. The sale of General Motors stock is a windfall for the treasury. And you can be sure the Harper government takes great pleasure in disproving the forecast of Kevin Page, the first gadfly Parliamentary Budget Officer, that the deficit created by the recession in 2009 would prove structural. Adopting a balanced budget law reinforces its message that structural deficits did not return. However, the fact that the Ontario government currently borrows about $20 billion a year despite its own balanced budget law shows how easily such rules are flouted. The federal budget will remain balanced not because of this law, but because the government has capped its future liability for health care transfers and pension obligations and begun the long, arduous process of reining in the compensation of its employees.

Related
Terence Corcoran: Is Joe Oliver leading a tax revolt?
Conservatives to introduce balanced budget legislation, Joe Oliver says
Ontario’s decades of debt will resonate with taxpayers for years to come

Structural deficits exist in Canada, but at the provincial not the federal level. The provinces already are mired in large debts and deficits, even before the real tsunami hits from soaring health care spending for an aging population. The token restraint offered by Alberta and Quebec in their recent budgets shows that the provinces are not yet willing to tackle the fundamental reforms needed to how they deliver education and health care and the outrageous compensation their employees receive. The provinces’ desperate need for revenues is why none even bother pretending that the various carbon tax proposals currently circulating will be revenue neutral, as intended by their naïve academic proponents, leaving us with a more burdensome and not a more efficient tax regime.

The fiscal position of the provinces is a lot like Canada’s in the 1970s, when government debt first began to mount. The actual increase in the underlying structural deficit at that time was even worse, but was hidden by artificially low interest rates and high nominal growth. The full extent of the underlying deficit was revealed when interest rates soared and growth slowed in the early 1980s. The same is playing out now for the provinces; as bad as their fiscal position looks, their larger structural deficits are being masked by record low interest rates and steady growth in most of the country.

Philip Cross is a Senior Fellow at the Macdonald-Laurier Institute and the former Chief Economic Analyst at Statistics Canada

 

[CougarKing]

The opportunity from the TPP that may soon pass us by because of the need to protect our dairy industry?

Reuters

Canada risks being sidelined in Pacific trade deal: USDA head

By David Dolan

ISTANBUL (Reuters) - Canada risks getting left behind in a 12-nation Pacific trade deal because it has been reluctant to negotiate on opening its markets, U.S. Agriculture Secretary Tom Vilsack said on Thursday. Vilsack also told Reuters that longstanding disagreements with Japan over rice exports would not threaten the Trans-Pacific Partnership (TPP) and that the two countries were working toward a compromise.

Canada, like Japan, has been reluctant to put down a final offer in the talks, over concern U.S. lawmakers could pick apart agreements afterwards. Canada remains keen to shield its dairy industry. Ottawa has so far not put forth a "reasonable offer", Vilsack in an interview in Istanbul ahead of a G20 meeting of agriculture ministers.

(...SNIPPED)